Satellite-TV provider BSkyB intends to be a major force in the U.K. triple-play market, unveiling broadband plans this week that are bigger, bolder and more ambitious than anyone expected.

Looking to capitalize on its acquisition of terrestrial broadband provider Easynet, BSkyB revealed that it plans to spend more than 400 million British pounds ($729.4 million) throughout the next three years on its broadband initiative, a much larger amount than many analysts estimates. "The surprise was the numbers," Bridie Barrett, a media equity analyst at ABN Amro told Satellite News. "We were assuming a total of investment of around 250 million pounds ($455.9 million) over a four-year period. The scale of the investment is higher than we envisaged, but at the same time, the targeted number of subscribers in three to four years is higher."

BSkyB’s share price slipped 4 percent July 18, the day of the announcement, but Paul Richards, a media equity analyst at Numis Securities, praised BSkyB’s initiative. "The market has clearly been taken aback by the scale of BSkyB’s ambition," he said in a research note. "… In our view the strategy is attractive, and although we expect the broadband market to be very competitive going forwards, we believe that BSkyB should be able to carve out a substantial, and very profitable, position."

Ambitious Subscriber Targets

But there were more surprises other than just the sheer scale of the investment. It had been expected that BSkyB would offer a one-size-fits-all broadband offer, and that this would be aimed mainly at its premium subscribers.

BSkyB chose a different route, planning to offer a tiered approach available to all of its subscribers. A basic subscriber paying 15 pounds ($27.35) a month will be able to get free broadband, with speeds of up to 2 megabits per second, which looks a very compelling deal on paper.

BSkyB also will offer pay broadband services. Sky Broadband Mid will retail for 5 pounds ($9.11) a month and offers download speeds of up to 8 megabits per second and 40 gigabytes of usage. The Max offering is priced at 10 pounds ($18.23) a month and has download speeds of 16 megabits per second, unlimited downloads and free home installation. A new telephony service, the relaunched Sky Talk, also was unveiled where customers can get unlimited phone calls to other U.K. landlines for 5 pounds ($9.11) a month plus line rental.

BSkyB hopes this mixed offering will help it capture up to 3 million broadband subscribers in the United Kingdom by 2010.

"Clearly, Sky is hoping that the offer will help to accelerate pay-TV take up," Patrick Wellington, a media equity analyst at Morgan Stanley, said in a research note. "But at present there are 8.1 million BSkyB customers out of 25 million households in the U.K. At present, therefore, BSkyB is targeting just one-third of the potential U.K. market. By 2010, BSkyB is looking to achieve 10 million pay TV subscribers with one-third taking the broadband offer. On the basis that most forecasts have 70 percent of the U.K. on broadband at that stage, BSkyB is looking for three million subscribers out of total broadband homes of 18 million, or a market share of 16.5 percent."

Sky’s network in the U.K. already passes just under 30 percent of households in the U.K. including major cities such as London, Birmingham, Manchester, Edinburgh and Glasgow. It is expected to reach more than 70 percent of all U.K. households by the end of 2007.

Nick Bertolotti, a media equity analyst at Credit Suisse questioned whether BSkyB will be able to persuade customers to take the more advanced broadband packages. "Sky’s strategy for Easynet appears to be a departure from its normal premium high-end products," he said in a research note. "It is more mass market in nature, and its key differentiating factor is its low cost. Sky expects the majority of subscribers to take the base 2(-megabit) megabit package and then hopes to upsell them to higher speeds as their appetite for content increases. However, we are skeptical that it will be easy to upsell given that broadband speeds continue to rise whilst their cost of subscription falls."

Market Dynamics

The U.K. broadband market has developed some interesting dynamics in 2006, with multiple free broadband offerings hitting the market. Carphone Warehouse set the ball rolling by launching a free service in April linked with its telephony services. Orange has also got in the act, offering a free broadband service to some of its best wireless customers. The competition is now boiling down to multiple services, and triple-play competition has begun in earnest. Later this year, British Telecom (BT) will launch its Internet Protocol (IP) TV service and be in a position to offer customers a full range of communications and entertainment services. Cable operator ntl, which will soon switch to the Virgin brand, will be able to offer a quadruple play in the near future where they bundle mobile services alongside their triple-play offering.

Bob Larribeau, a media analyst at MRG, told Satellite News that BSkyB’s latest move marks a key transformation for the satellite-TV provider. "This is a disruptive strategy that repositions BSkyB from a single-play video provider to a triple-play provider all at once. Its offer of a basic broadband service for free to all video subscribers will be very attractive to the mass market that has not yet committed to broadband. These people know they should have broadband and the ability to get it for free will cause many of them to move. This is a direct challenge to the new BT service, which is based on free digital terrestrial content and to its 21^st century VoIP (Voice over IP) strategy. It raises the ante against the consolidating cable companies. It also makes it much tougher for the competitive IPTV companies such as Orange and Video Networks."

In terms of how others might respond, Larribeau said, "I think BT will have to respond with a broadband package that includes unlimited VoIP calling. Its broadcast digital terrestrial content is already free. It will certainly offer free on-demand content."

Defensive Move?

BSkyB’s broadband offering most likely will appeal first to its existing customers, Michael Philpott, a broadband analyst at U.K. research consultancy, Ovum, said to Satellite News, "I think it will go down quite well with existing Sky customers. If you compare it to the Carphone Warehouse offering, it may not be as a good a value, especially if you take like for like. But I don’t think Sky are trying to do that. I think they are trying to appeal to existing TV customers who also want to not only get a good value broadband service, but to start to converge the TV and entertainment experiences with the broadband experience."

Sky’s strong reputation for customer service could also come into play. Philpott added, "Customer care is an important aspect of this. Sky do this a little bit better than some of the telcos. They have said that they have invested a lot of money into this. Historically, telcos have invested in customer care after they have launched the service."

The size and details of the offering also could be viewed as a defensive move by BSkyB to keep its existing subscriber base happy. "You could say they are going for a landgrab, and it is a churn buster if you get to keep those basic subscribers happy at this stage in the game. It is the 2 million basic subscribers who are at risk of churning onto platforms like Freeview who they are really targeting here. A free broadband package means you are keeping your basic customers and then having the opportunity to migrate them outwards.The strategy they presented was very solid. It just doesn’t answer the broadband question, it helps address the other question marks hanging over Sky’s strategy."

BSkyB’s broadband offering likely will appeal to ntl subscribers who take TV services from Sky. ntl dismissed any concerns. "We expect the broadband market to intensify, which can only be good for consumers, but we are confident consumers will know they will always get great bundled deals with cable," nil’s chief commercial officer, Ernie Cormier, said.

Changing Role

What this broadband strategy ultimately indicates is BSkyB’s move away from just being a direct-to-home operator and content provider. IP is now a core part of its strategy, and the ability to offer a range of services and be the central provider in the digital home will be key to its success going forward.

"Offering multiple services is the future because it reduces churn," Michelle Abraham, a media analyst at In-Stat added. "It is also the only way to be able to offer future on-demand applications. I expect Sky’s strategy to win it a lot of broadband customers from among its current TV customers. I expect satellite pay-TV to be part of a range of services. Whether this is offered by the satellite operator themselves or through partnership with external broadband suppliers as Canal+ is doing will be up to the operators."

In terms of whether other satellite pay-TV operators will follow BSkyB’s lead, Paul Erickson, a media analyst at IMS Research said, "I think it’s safe to assume that those with the financial and organizational resources to do so are either already doing so, or in the process of doing so. I expect that we will see the same strategy in Italy. Sky is getting strong competitive pressure from FastWeb and Telecom Italia as well as digital terrestrial. This strategy should export well."

–Mark Holmes

Contact, Robert Fraser, BSkyB, e-mail, [email protected]; Rachel Turner, ntl, e-mail, [email protected]; Michelle Abraham, In-Stat, e-mail,[email protected]; Paul Erickson, IMS Research, e-mail, [email protected]; Bob Larribeau, MRG, email, [email protected]; Claire Booty, Ovum, e-mail, [email protected]; Patrick Wellington, Morgan Stanley, Tel +44 207 425 8000; Bridie Barrett, ABN Amro, Tel +44 207 678 8000; Nick Bertolotti, Credit Suisse, Tel +44 207 888 8888; Paul Richards, Numis Securities, Tel+ 44 207 776 1500